Fed, in Shift, Expects Slower Increase in Interest Rates

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Janet L. Yellen, the Fed’s chairwoman, said that economic and labor market conditions were improving, but the central bank was not yet ready to pull back.CreditCreditShawn Thew/European Pressphoto Agency

The Federal Reserve indicated on Wednesday, following a meeting of its policy committee, that it plans to raise interest rates even more slowly than its officials had previously predicted.

The Fed still plans to start raising rates before the end of the year. Janet L. Yellen, the Fed’s chairwoman, said that growth had rebounded after a difficult winter, and that the Fed was simply waiting to make sure the economy was finally ready for higher rates. But she emphasized that even after rate hikes began, borrowing costs would remain low for years.

“It’s not an ironclad guarantee, but we anticipate that that’s something that will be appropriate later this year,” Ms. Yellen said at a news conference on Wednesday, referring to raising rates above zero for the first time since December 2008.

For years, Fed officials said they expected to begin the process in June, but they are now delaying at least until September in part because economic growth has once again disappointed. In a retreat that has become a ritual for the overly optimistic central bank, officials said in a new round of economic forecasts published Wednesday that they expected the economy to grow this year by 1.8 percent to 2 percent. In March, they predicted growth of 2.3 percent to 2.7 percent.

Almost all the 17 Fed officials on the Federal Open Market Committee expect to raise rates this year, but seven now expect no more than a single increase, compared with three who held that view in March.

Officials also predicted they would raise rates more slowly in subsequent years. On average they now expect rates to reach 1.75 percent by the end of 2016. Last June, the average prediction was that rates would reach 2.5 percent by the end of 2016.

Ms. Yellen described these reductions in the expected level of interest rates over the next several years as more important than the month the central bank chooses to start raising rates.

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Janet L. Yellen, Federal Reserve chairwoman, said the United States economy is on track to grow between 1.8 percent and 2.0 percent this year.CreditCreditChip Somodevilla/Getty Images

“I want to emphasize sometimes too much attention is placed on the timing of the first increase,” she said. “What should matter to market participants is the entire trajectory of expected policy.”

Investors appeared to accept the argument. Even without any apparent change in the timing of the first increase, the yield on the benchmark 10-year Treasury fell to 2.306 percent after the announcement, from 2.315 percent on Tuesday. The Standard & Poor’s 500-stock index increased 0.2 percent to close at 2,100.44.

“The real question is not when they start but how fast and how high they go,” said Kim Schoenholtz, an economist at New York University. “And what we’ve seen is they keep scaling back the equilibrium rate they intend to reach and the pace they intend to get there.”

Analysts continued to predict that the Fed would most likely start raising rates when it meets in September, but many investors remain skeptical.

The prices of interest-rate-sensitive assets continue to reflect an expectation that the Fed will wait until December, or possibly until next year, before it increases rates. And that strategy of betting against the Fed’s optimism has been consistently profitable in recent years.

But Gene Tannuzzo, a senior portfolio manager at Columbia Threadneedle Investments, said skepticism had run its course.

“The market is pricing in some doubt that they will get started,” he said. “Looking forward from here, I think Ms. Yellen will do what she has said.”

Officials predicted that the unemployment rate would decline more slowly in coming months than they had previously anticipated. It sat at 5.5 percent in May, and the Fed now expects that it will end the year at 5.2 to 5.3 percent, compared with an expectation in March that it might go as low as 5 percent. That is a significant change, because it means officials now expect that rate to end the year at or above its estimated long-term equilibrium rate of 5.0 to 5.2 percent.

But Ms. Yellen said the change actually reflected the increased strength of the economy. She said that participation in the labor force appeared to be stabilizing as people became more optimistic about finding work, and that she saw “tentative signs of stronger wage growth.”

A small group of Fed officials has already concluded that a rate increase this year would be premature, pointing to the sluggish pace of inflation. The Fed’s preferred measure of prices rose by 1.2 percent in the 12 months ended in April, and it has remained below the Fed’s 2 percent target for three straight years. The International Monetary Fund has also urged the Fed to wait.

But officials who want to start raising rates this year remain optimistic about coming years, at least for now, predicting economic growth of up to 2.7 percent in 2016 and up to 2.5 percent in 2017.

They argue that growth will be strong enough to justify their expectation that inflation will rebound. Officials made little change in the inflation forecasts, predicting that prices would rise no more than 0.8 percent this year and 1.9 percent next year. They also continued to predict that inflation might reach the Fed’s 2 percent target in 2017.

“If you’d gone to sleep a few years ago and someone had said to you unemployment is at 5.5 percent and the economy is growing, yet interest rates are at zero, you’d be a bit surprised,” Mr. Schoenholtz said. “There are good reasons why rates are at zero, but the Fed has been very cautious in postponing rate hikes as long as it has.”

The Fed’s stance contrasts with that of major central banks in Europe and Asia, which remain deeply immersed in efforts to revive their economies. For the United States, the weakness of the global economy has weighed on growth, driving up the value of the dollar and limiting demand for American exports. “If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise,” Stanley Fischer, the Fed’s vice chairman, said last month.

Raising interest rates also could disrupt financial markets, although the consequences are hard to predict. There have been only a handful of tightening cycles in the Fed’s hundred-year history, and the differences outweigh the similarities. “Our experience suggests that it’s hard to have great confidence in predicting what the market reaction will be” to Fed decisions, Ms. Yellen said at her news conference.

As if to emphasize those differences, Ms. Yellen said that it was possible the Fed should have raised rates more quickly during the last tightening cycle, from 2004 to 2006, even as she underscored the Fed’s intention to move more slowly this time.

A version of this article appears in print on , Section B, Page 1 of the New York edition with the headline: Fed Delays Rate Move and Predicts Slow Rises. Order Reprints | Today’s Paper | Subscribe